News

Tax Reform 2017 – Individuals

Published on: 11/03/2017

I have very mixed feelings about the proposed tax law changes. Some of my clients will benefit; others will be left in the dust.

Because we live in a high income tax state, there is less to love about this bill than if we did not. The bill only allows for the deduction of $10,000 of state and local property tax, no deduction for state income tax. California has the country’s highest marginal income tax rate — 13.3%. Ouch! That’s a big deduction to lose.

The bill has some good news for those who take the standard deduction or who — because their itemized deductions are only slightly higher than the current standard deduction — just barely benefit from itemizing. The standard deduction will double. Unfortunately, personal exemptions are being eliminated. So, a family of three would find the additional standard deduction ($12,000) wiped out by the elimination of personal exemptions ($12,150). Okay, so it’s not such good news, after all…

But there really are glad tidings for those who benefit from the child tax credit; the credit is increased from $1000 to $1600. Further, there is a small credit — $300 — proposed for those who have non-child dependents (dependents who don’t qualify for the child tax credit).

Taxpayers with mortgages in excess of $500,000 (uh, like most of California, where the median home value is just over this amount; median home value here in Ventura County is $565,000) will be hurt. Currently, interest is deductible on mortgage acquisition debt up to $1,000,000; this bill cuts that limit in half. This will not only hurt California home buyers, but it will handicap our construction, mortgage and other related industries, as well.

With the exception of charitable contributions, many other deductions will be saying bye-bye, as well. Student loan interest and moving expense will no longer be deductible. A big loss for many will be the non-deductibility of alimony (this basically means alimony will be taxed twice — by the payer as well as the recipient).

Medical expense will no longer be deductible. For many of us, this is not a big loss. Normally, it’s difficult to get over the current 10% of AGI (adjusted gross income) that we have to absorb, so we don’t see a lot of deductible medical expense. However, for seniors in care facilities, this is a huge expense; in fact, it’s what keeps many of them from incurring a tax liability. This will hurt them most.

One positive for many middle income taxpayers will be the repeal of the dreaded Alternative Minimum Tax. The AMT began as a ‘punishment’ for those who took advantage of ‘too many’ deductions. It was never indexed for inflation, so, as incomes grew, the AMT exclusion did not. Now, many middle income families are snared in its trap. Personally, I’d be happy to see it disappear.

Overall, passage of this bill as it is currently written will be painful for many middle income Californians, particularly wage earners. It will be interesting to see how much of this becomes law.